LAUNCESTON, Australia, July 28 (Reuters) – One thing has become clear from the latest production reports from the big three iron ore miners: They appear intent on ensuring their dominance by boosting low-cost output.
BHP Billiton mined a record 225 million tonnes of the steelmaking ingredient in the year to end-June, beating its own forecast by 4 percent. BHP said in its latest production report that it expects to increase output further, to 245 million tonnes in the 2014-15 financial year.
Fellow Anglo-Australian miner Rio Tinto boosted output 23 percent in the second quarter from the same period last year to 75.7 million tonnes. It also is forecasting higher annual output, with the quarterly report released on July 16 pointing to 2014 production of 295 million tonnes, up 11 percent from 266 million in 2013.
The world’s biggest iron ore miner, Brazil’s Vale , also had record output in the second quarter, posting a 12.6 percent gain to 79.45 million tonnes. The company is planning to boost its annual output to 450 million tonnes by 2018 from 306 million last year.
The three global iron ore giants have effectively gambled that they can continue to boost production and grab bigger slices of global demand, given that they can withstand lower prices due to their low-cost mines and economies of scale.
So far it seems to be a winning strategy as they don’t appear to be battling to sell their output, and they are still likely to report strong profit growth as they reap the benefit of massive cost-cutting programmes over the previous two years.
The miners are apparently in a sweet spot. Staying there depends on iron ore prices not falling too much, which in turn is largely dependent on developments in China, buyer of about two-thirds of seaborne iron ore.
Spot Asian iron ore .IO62-CNI=SI has fallen nearly 30 percent this year, but at the July 25 closing price of $94.30 a tonne it was 6 percent higher than the mid-June low of $89.
The decline in price from $134.20 a tonne at the end of last year is a reflection of the increase in supply and concern over China’s economic growth in the first half of 2014.
Revelations that iron ore is being used as a financing tool in China have also stoked concerns that inflated inventories could be sold quickly as fears mount in the wake of a scandal involving the use of a single cargo for multiple credit deals.
However, the outlook for iron ore demand has improved recently with the HSBC/Markit Flash Manufacturing Purchasing Managers’ Index rising to an 18-month high, suggesting the Chinese economy is rebounding.
The risk is that even a stronger economy won’t be able to soak up the flood of iron ore the global miners are producing.
CHINESE DOMESTIC OUTPUT DECLINING
The big three miners are no doubt hoping that the lower iron ore price will knock out Chinese domestic output, as well as higher-cost, smaller-scale mines around the globe, and stymie efforts by Indian miners to re-enter the seaborne market.
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